For the last half dozen years, the weather and market conditions have treated the U.S. cattle industry with all the tenderness given to Rocky Balboa’s face in the early rounds of that famous boxing match in the first Rocky movie.  Battered first by an epic drought, it was bloodied by the highest feed costs cattlemen have ever seen.

Taking the worst hits were the southern plains; Texas, Oklahoma and southern Kansas gave new meaning to the term “high desert country.”  Herd liquidation was unprecedented in those areas as many cattlemen got out of the business or moved their herds north.

You’ve heard that phrase, “There are old pilots and bold pilots but no old, bold pilots?”  Well, this business is a little tougher than that.  We have old cattlemen, bold cattlemen and even a few old, bold cattlemen – anybody seem Paul Engler, lately?  But the weather and feed prices have taken the starch out of some of the best of them.

A turn-around is on the horizon, though, and it’s time to take a serious look at the future of the industry.  Rebuilding will happen and Dr. Peel thinks it could come much quicker than usual.  He’s one of the sharpest observers of the industry and has a great vantage point at the Department of Agricultural Economics at Oklahoma State University in Stillwater. He looked at the horizon and didn’t see a haboob – one of those massive and horrendous dust storms that have pounded Phoenix lately. It looked more like opportunity to him. 

Drovers/CattleNetwork published his thoughts last week.  I read it and had a bunch of questions.  So I contacted him and asked a few.  Here are his responses.

Q. Derrell, there has been a lot of discussion about the size of the herd today and most of it has been of the gloom and doom variety.  Although you agreed with the data that it's the smallest it has been since the early 1950's, you seemed to be optimistic about the future, citing an increase in replacement heifers during the recent drought-driven cull.  What effect will those heifers have on herd size and how quickly can a significant increase happen?

A. In the years 2009-2011, the number of heifers entering the herd was increasing despite the fact that the January 1 inventory of replacement heifers was falling and despite the fact that elevated beef cow culling was more than enough to result in declining herd inventories. This suggests that, while external factors such as severe input market shocks and recession were forcing net herd liquidation, producers perceived those shocks to be short term and they continued to invest in more replacement heifers. 

In 2012, the opposite occurred, the January 1 heifer inventory was higher, a more overt indication of expansion plans, but the drought resulted in a small percentage of those heifers entering the herd.  January 1, 2013 posted another increase in heifer inventories and we don’t yet know how many of those heifers are entering the herd.  I suspect that some replacement heifers were diverted into feeder markets in the first half of the year but it appears that heifer retention is likely expanding in the second half of the year as retention restarts with more “new crop” heifer calves this fall.  Overall, I expect that the number of heifers entering the herd in 2013 is above average but less than it would have been without the residual drought effects and the winter impacts in the first half of the year. 

Historically, cattle cycles have exhibited one or two years of little or no growth – stabilizing the herd, if you will - prior to two or three years of more rapid expansion.  It takes time to build momentum for expansion.  I believe that, despite the drought impacts, much of this stabilization has taken place or is happening in the last part of 2013.  More herd liquidation has likely occurred in 2013 making January 1, 2014 another herd inventory low but, with favorable forage conditions, herd growth in 2014 could be relatively rapid, perhaps as much as two percent.  This relatively rapid rate of expansion in not a certainty but is possible given the demographics of the beef cow herd.

Q. Quite a few people have told me that one of the potential barriers to rebuilding the herd size is the aging population of our ranchers.  The theory is that a lot of ranchers who are 65+ years old will look at the financial risks involved in a multi-year rebuilding process and decide it isn't worth the effort.  Could that be an accurate assessment?

 A. The demographics of the cattle producer population is an important issue in herd rebuilding and the future of the cattle business. Among a continually aging U.S. farmer population, cattle producers are among the highest average age of any farm sector.  Many of the older producers gradually reduce production as capabilities decline and they essentially retire in place.  These producers are not likely to initiate new investment in cow herds regardless of potential opportunities.  However, as time marches on, there will inevitably be a significant turnover in production assets in the cattle industry. 

At the same time, the challenges for young producers to get started in the cattle business have arguably never been greater.  High asset values make the capital requirements unreachable for many young producers, especially with much tighter lending requirements that are now in place. It is increasingly unrealistic for young producers to borrow enough to buy all the assets they need from the outset, as has been the traditional model for the cattle business. 

I believe that markets work and, if the opportunities offered in the cattle business are great enough, a new generation of producers will emerge.  However, the manner in which that happens is likely to be somewhat different in the future.  Young producers need to recognize the critical difference between asset control and asset ownership.  Leasing, contracting and managerial arrangements may play a much bigger role in the future of the cattle business.  Older producers, who hold most of the equity, need to understand farm business transition alternatives and be encouraged to participate in withdrawing their retirement from the business in a way that facilitates the entry of young producers.  There may be tax and other policy changes that would provide better incentives and opportunities simultaneously for older producers and new producers.

Q. One of the major problems faced by the industry was the cost of feed. Corn was flirting with $8 bushel coupled with scarce forage, especially in the Southern belt has been devastating to many cattle ranchers.  One of the outcomes was a massive cull in states like Texas and Oklahoma and the “center of the population” moving northward. Will those states be able to rebound or will our herd be centered in more northern areas?

A. Two factors have had a significant impact on the regional distribution of cow-calf production in recent years.  The drought has taken a relatively bigger toll on herds in the Southern Plains and has shifted herd inventories a bit more to the north.  At the same time, high crop prices have made forage relatively less competitive for land use and resulted in a loss of pasture and hay production in crop production areas.  The epicenter of these crop impacts is the Midwest with impacts diminishing westward into the drier areas of the Great Plains. These east-west factors may be more important than the north-south factors.  High crop prices imply a long term shift of cow-calf production out of crop production regions and more into the drier areas where crop production competes less with forage production.

There are time issues as well.  The native range areas of the western Great Plains and Rocky Mountain regions have endured significant stress and damage to the native forage base during the drought.  These regions will take several years to recover and will require careful management to return to full production capability. The cow herds will rebuild in the Southern Plains, more quickly in the eastern side where there are more introduced forages and higher rainfall and more slowly in the western regions of native range. 

Q. To quote your article published last week in Drovers/CattleNetwork, "Most of the cow herd liquidation that has occurred since 2001, including the aborted herd expansion of 2004 and 2005, were the result of external factors including input market shocks that reduced cow-calf profitability; a U.S. and global recession that tempered cattle prices and producer expectations; and severe drought since 2011.  This means that the last 3.4 million head decline in the beef cow herd was not due to typical cattle cycle factors."

Are those typical cattle cycle factors a thing of the past and are we facing some new norms that will change the way we manage our herd size?  Do we have to pay a lot more attention to drought conditions that might be much longer term than in the past and will the financial uncertainties of the world market continue to have a bigger impact?

A. The factors that have always caused cattle cycles: producer reluctance to change production; rigidities of the forage base; and the biology of cattle (long lags in production and single offspring) have not changed and will continue to influence the beef industry.  That said, the unprecedented shocks that have overwhelmed cyclical factors for the past six years may play a bigger role in accelerating, diminishing, amplifying, or offsetting cyclical tendencies in the future. 

While future drought conditions are impossible to predict, other factors seem to have changed.  For example, the remarkable stability of feed and energy prices for much of four decades prior to 2007 has likely been permanently replaced by more volatile input markets.  Compared to the relative ease of identifying cattle cycles historically, future cycles may have a lot more noise around them and be more variable; but I think the cyclical tendencies will still be there and will be important.

Q. You suggested that we now have one of the youngest and most productive herds which could lead to a faster that usual expansion.  Talk me through the numbers and the time frame needed to get back to the size we had before the recent downturn.  And is a return to those numbers necessarily a good thing?

A. There are two questions here:  How fast can we grow and how big does the industry need to be?  The second question is one that has not been addressed much at all through the long liquidation but will be very important once expansion actually begins.  Keeping in mind that a multitude of factors could change along the way, let’s look at herd expansion in several steps.  I project that the January 1, 2014 beef cow herd will be just over 29 million head.  That means it will take about 1.75 million head of expansion just to get back to herd levels on January 1, 2011, prior to the drought. That level of expansion seems to me to be an absolute minimum. Even with relatively rapid growth in 2014, it likely takes two-and-a-half to three years to recoup just what has been lost in the drought. 

Beyond that it becomes much more speculative.  The 2004 level of 32.5 million beef cows was the previous level at which the industry tried to expand so maybe we need to go back at least to that level.  That’s an additional 1.7 million cows, which likely takes another three or so years.  Can the industry sustain upwards of six years of herd expansion?  I believe it is possible given that the industry has been through 17 years of nearly continuous liquidation, much of which was caused by shocks that forced the industry today to be significantly smaller than it intended or needed to be.

Q. Consumer demand, of course, is the real driver behind the future of the cattle industry and the price of a pound of beef is, for most people, the ultimate decision-maker.  There is some research that suggests higher beef prices in the supermarket are causing some tradeoffs to other protein resources.  Will prices become more competitive soon?

A. Demand is, indeed, the answer to the previously posed question about how big the industry needs to be.  It will depend on demand, both domestic and international. U.S. beef demand is mature and not likely to grow rapidly though it will likely grow, perhaps more in value terms, but also modestly in quantity terms.  There is, I believe, significantly greater demand potential in the global market.  Does the U.S. beef cow herd need to be 31 million head? 33 million head?  35 million head?  Many dynamic factors will be affect the answer, but my guess now would be 31 million head at a minimum, with 33 million a distinct possibility.  Beyond that….?

In the meantime, the current squeeze on cattle numbers and initial impacts of herd expansion mean that beef production will decrease into 2015, at least, and perhaps into 2016.  Beef prices will remain very high and the challenges to beef demand during that period will be unlike any we have ever seen.

The opinions expressed in this commentary are solely those of Chuck Jolley, a veteran food-industry journalist and commentator.